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Marico outperformer; target Rs 69: HDFC Securities

Tuesday, July 31, 2007

Marico has reported a spectacular set of numbers for Q1FY08, due to a combination of both organic and inorganic growths. On a consolidated basis, net sales for the quarter grew 26% yoy, operating profit 17% yoy and net profit 33%. The recently acquired Egyptian brands, ‘Fiancee’ and ‘Haircode’ contributed around Rs 220 million to the revenues of the company for Q1FY08. Marico’s operating margin declined 100 bps yoy to stand at 14.1%, mainly due to the increase in raw material expenses and higher staff costs. However, its operating margins improved by 400 bps sequentially to stand at 14.1%, on account of lower Advertising and Sales expenditure (ASP), which stood at 10.9% vis-à-vis 15.1% of net sales. With the Fiancee and HairCode brand acquisitions, Marico is likely to garner over 50% share in the Egyptian hair care market.

Strong sales growth

On a consolidated basis, Marico has reported 26% YoY growth in net sales from Rs 3.73 billion to Rs 4.69 billion on the back of excellent performance across all segments. This comprised of 20% organic growth and 6% inorganic growth derived from brand acquisitions. The focus brands comprised 80% of the group’s turnover in Q1FY08 against 79% in Q4FY07.

Among the brands, Parachute coconut oil achieved a double-digit volume growth on a YoY basis, helping it to improve its market share to 49%. Together with Nihar, Marico enjoys a market share of 57% in the branded coconut oil market. On the other hand, the focus segment of the hair-care range (excluding Nihar) grew by 20% yoy in volume terms. In the perfumed coconut oil category, Marico commands a market share of 82% attributed to its two key brands, Nihar and Parachute Jasmine.

In the premium refined oil category, Marico’s flagship brand ‘Saffola’ grew its franchise by 28% yoy in volumes, mainly on account of the success of the two blends ‘Saffola Gold’ and ‘Saffola Tasty’.

Marico’s international business reported sales of approximately Rs 660 million with an 82% growth on a YoY basis. The growth mainly came from the contribution of the recently acquired brands in Egypt, Fiancee and Haircode. Marico’s market share has increased by 1.8% after the acquisitions. The turnover from operations (excluding Egypt) stood at Rs 450 million for the quarter.

Operating Profit Margins at 14.1%

Marico reported a growth of 17.0% yoy in operating profits to Rs 660 million. The company’s operating margin declined 100 bps to 14.1% on a YoY basis, mainly due to the rise in raw material costs and staff expenses. Marico’s material cost increased by 80 bps from 51.3% to 52.1% of net sales due to the rise in edible oil prices during the quarter. During Q1FY08, staff expenses increased by 170 bps to stand at 7.3% of net sales on account of annual increments, increase in headcount and provisions made for performance-linked pay.

Advertisement and Sales Promotion (ASP) expenses decreased by 210 bps YoY from 13.0% to 10.9% of net sales. ASP expenses vary from quarter to quarter depending on new product launches and media plans for established brands. Going forward, the company expects to maintain these costs in the range of 12% - 13% of net sales. Other expenses for Q1FY08 stood at 15.6% of net sales, compared to 15.0% in Q1FY07.

Net Profit up by 33% YoY

The interest costs of the company increased by a whopping 47% to Rs 70.8 million. This was on account of higher working capital to support the strong sales growth. The net working capital turnover stood at 34 days, compared to 27 days in Q1FY07.

Depreciation for Q1FY08 declined 48.3% yoy to Rs 57.7 million, on the back of financial restructuring carried out in FY07, involving an adjustment of intangible assets against special reserves to the extent of Rs 3,090 million.

Supported by lower depreciation charges, the Net profit for the quarter increased 33% yoy to Rs 402 million. The effective tax rate for Q1FY08 stood at 25.3%, compared to 26.8% for Q1FY08. EPS for the quarter stood at Rs 0.66.

Outlook & Valuations

The stock is trading at 20.6x FY08E and 16.9x FY09E EPS of Rs 2.7 and Rs 3.3 respectively. We maintain our OUTPERFORMER rating on the stock with a target price of Rs 69 based on 21x FY09E EPS.


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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.